Turn up the volume

Like many UK engineering groups, Smiths Industries manufactures on both sides of the Atlantic. But while it sells more of its products in the UK and Europe, it makes a bigger share of its profits in the US. Last year, margins at its UK operations were an impressive 17%. But its US operations made 20%. […]

Like many UK engineering groups, Smiths Industries manufactures on both sides of the Atlantic. But while it sells more of its products in the UK and Europe, it makes a bigger share of its profits in the US. Last year, margins at its UK operations were an impressive 17%. But its US operations made 20%.

Einar Lindh, chairman of Smiths’ industrial division, which makes air movement and electrical connection products, says sales volumes in the US are the key to higher profits: `You are looking at large factories where the yield on the first $100m is at 20 cents in the dollar, but once you go over that you get a yield of 40-50 cents.’

He believes the US and UK provide similar business environments, but says there are differences in market size and employee flexibility.

The size of the US market – the largest in the world – is often given as a reason for the success of its domestic manufacturers. According to Lindh, there is no reason why goods for the US should be made there, although sometimes it helps if they are. `There isn’t a nationalistic resistance to imported products,’ he says. `However, what you do have to do is be able to demonstrate that you have substance in the country in terms of support. Clearly, that is often associated with having a manufacturing plant there. And sometimes, because of the way the supply chain works, the pressures on you to have local manufacture are irresistible. They want you there.’

The same pressures do not operate here because the smaller size of the UK makes it vulnerable to competition from neighbours in the eurozone, Lindh says. `The biggest problem in the UK is that you can only get that scale by exporting, and with the pound being where it is, it doesn’t make for a terribly attractive proposition for your customers. Our guys are looking at situations where competition is coming in and offering an imported product that cost 20% less than ours. It is very difficult.’

There is little to choose in employment costs between the two countries, Lindh says, because the apparently low price of US labour is offset by the need to provide medical cover. He believes US employees, especially managers, are also more willing to move for the right job. `It never fails to surprise me – the fact that they live in Florida but will apply for a job in Seattle. They seem to have a very much more pragmatic attitude to where they live than the Brits,’ he adds.